Alameda-FTX Government Regulations and Cryptocurrency Lessons (Opinion)

The scale of the economic loss to cryptocurrency investors last year was huge. Not only FTX International but also other companies such as Three Arrow Capital, Celsius, Genesis, Gemini, Voyager Digital and BlockFi will go bankrupt.

Bitcoin’s price has yet to recover from the ongoing streak of crypto bankruptcies, even though it has shed some of the losses from the FTX debacle. I was. With each new bankruptcy headline, the price of Bitcoin fell.

We do not know if the recent Bitcoin price rally to $21,000 was a breakout or a January bull trap. Meanwhile, last year’s bankruptcy continues to unravel in bankruptcy and criminal courts.

Bankruptcy lawyers said Wednesday that FTX has found $5 billion in liquid assets. While under house arrest on a $250 million bail bond, Sam Bankman-Fried began blogging on his Substack on January 12th.

“In November 2022, Alameda became insolvent due to an extreme, rapid and targeted crash caused by the CEO of Binance.”

Note that the conclusion of SBF’s “postmortem” is not that FTX didn’t have the customer’s money. A competitor’s CEO has publicly said that FTX has no customer money.

Sam Bankman-Fried was no chaotic cowboy on the digital frontier. It was Satoshi Nakamoto. In fact, SBF was a political mega-donor that fostered friendly relations with the US regulatory regime.

Plus, TradFi’s attitude to finance that plagued cryptocurrencies last year is exactly why we need them. Bitcoin should fix this. So do other open source peer-to-peer ledgers.

How Wall Street’s TradFi Bros looted the buzz surrounding cryptocurrencies

At the end of 2022, Bloomberg Businessweek announced a sequel to its October 2022 feature-length presentation, The Crypto Story.

A follow-up article was about Sam Bankman-Fried and Alameda FTX foibles. The title of the story is “How not to play the game”. This article expertly diagnoses the problem with his TradFi import into crypto.

“Maybe building fancy user interfaces and fast, clever trading algorithms is fun and profitable, but you might find yourself ignoring the accounting department because it’s boring. You may be good at collecting customer money with a sleek interface and playfulness, but you’re not good at tracking customer money because you don’t have an accountant and you’re playful.”

Cryptocurrency is basically a down-to-earth, coin-based anti-Wall Street industry. But the TradFi Brothers turned it into Wall Street’s evil twin. They have created a parallel crypto menagerie of financial hoaxes and accounting horrors.

“One of the imperfect but useful ways of thinking about crypto is that it allowed us to create a toy financial system. There was already a regular financial system, a set of abstractions and procedures…and virtual currencies , has emerged with a new set of things for doing finance.”

However, veteran financial columnist Matt Levine explains: more regulation. What is wrong with this article is that it ignores government influence. Because this story doesn’t address the impact of government regulation on last year’s bankruptcy crisis.

The government was not involved in this game, as “How Not to Play The Game” tells. But it’s not. The article itself advances some evidence for this characterization.

Because in it, the author talks about how the “crypto” business resold Wall Street’s worst excesses as crypto products. These Bad Business His ideas didn’t originate in isolation on Wall Street. They were made with regulatory approval as well as support and design.

“The game was played by young people from the traditional financial world, banks, hedge funds and quantitative proprietary trading firms.”

Will the photos be clearer? The Crypto bubble was not caused by humble miners running ASIC rigs. It was driven by these Wall Street entrants who brought with them the highly regulated Wall Street reckless financial culture.

What else should investors expect from substantial government intervention in the cryptocurrency market?

US TradFi Regulations Hurt Investor Finances

It was the US financial regulatory regime that made the dot-com bubble of 1999 and 2000 possible.

Advocates wanting to regulate crypto see that 91% of altcoins from 2014 are currently non-functional, and see reasons to pass more regulations on crypto.

But they want regulation from the same authorities that fueled the dot-com bubble. They conveniently forget what the regulated securities have done in exactly the same way the crypto sector did in 2020-2022.

Additionally, it was the regulators who were at the wheel of the home savings and loan crisis. This led to the real estate and financial bubbles of 2005-2007. By 2008, the entire global economy was in recession.

Giant government-backed corporations such as Fannie Mae and Freddie Mac fueled the madness by offering low-interest loans for subprime mortgage customers.

The Wall Street giants have close regulatory partnerships with governments and have invented mortgage-backed securities as exotic bond derivatives traded against each other by large financial institutions.

By 2007 the chickens were back in the roost. Home prices started to crate. At that point, the regulated traditional financial sector’s involvement in the bubble was insane. It was unethical.

Warren Buffett and Charlie Munger of Berkshire Hathaway would call it decadent and immoral. Buffett and Munger warned about it well before the inevitable burst of the housing bubble.

In 2005, they considered the residential real estate bubble and the destabilizing effect of hedge funds on financial markets to be the greatest threat to America after a nuclear attack.

How did regulation prevent the above?

It was under the watchful eye of US financial regulators that these crises took shape. And it was traditional financial firms that were compliant, even if they weren’t directly responding to regulatory incentives.

The damage to investors and households continues to this day. The US Treasury Department estimates that the housing crash cost the economy his $19 trillion loss in household wealth.

In addition, it is the SEC that allows algorithmic trading deadlocks, arcane derivatives, and insane leveraged trading. His TradFi mess masqueraded as “cryptocurrency” and made a ton of money while damaging the finances of many people. So what FTX did and what Bitcoin created the crypto segment is not the same.

Cryptocurrencies are seen as a move toward economic health, legitimacy, and honor. The traditional financial world was going through the shocks of 2000 and 2008, but it was because of regulation and Bitcoin’s ability to solve financial problems in the modern connected global world. The world was fortunately unaware that there would be one answer.

It was inevitable that the high reputation and appeal of cryptocurrencies like Bitcoin would be doomed by the forces of recoil. But as usual these so-called cryptocurrency projects doing crazy money business are not real but fake cryptocurrencies.

What happens when cryptocurrencies get used to governments and regulations

The worst-hit cryptocurrency business was the one with the most government influence.

Of course, after the demise of FTX, there were many reports that the SBF was very active in US federal politics. Open Secrets, a nonprofit that tracks public federal election donation records, reported in November:

“Sam Bankman-Fried, founder of cryptocurrency exchange platform FTX, was a darling in policy circles in Washington, DC. , plus $38.8 million to outside groups this election cycle, making us the sixth-largest individual donor for the 2022 midterm elections.”

Before Alameda-FTX’s fortunes changed, SBF planned to donate more than $1 billion to support the candidates and issues of his choice in the 2024 election.

The Winklevoss brothers and their Gemini exchange are also very comfortable in Washington. Like SBF, they bring big financial thinking to cryptocurrencies and are very active in lobbying and dialogue with regulators. Here’s my advice to Mark Zuckerberg when he was working on Libra:

“Work with regulators. Talk to them. You know, we definitely went through the front door and tried to educate regulators and shape regulation in a thoughtful way because Regulation wrong can stifle innovation, but regulation right allows innovation to thrive.I think we’ve struck the right balance with New York.”

As such, there have been numerous reports of these companies being involved with regulators. But has anyone shown the relevance that TradFi regulatory thinking is the cause of bankruptcy?

A regulatory mindset is not a business mindset. control function. It has nothing to do with how something is produced. I’m interested in how to control an already productive system and how to freeze it against competition from new entrants and give it time to grow.

The spirit of Crypto is that it does not require special treatment or protection. We don’t need more regulation to thrive. Cryptocurrencies thrive on openness and freedom, not barriers and regulations.

The Bitcoin community wants its great-grandchildren to spend that money and make it more valuable than ever. A currency initiated by a borderless, nationalless online community. As such, we do not believe our future is dictated by TradFi government regulations. Looking to the future with code that works as is.

Governance by untrusted code, not by trusted regulation

Cryptocurrencies are subject to government regulation. Governments can create laws to ban cryptocurrencies outright, as China has done. But Crypto is not an agent of the government.

A company, even a private company, is an agent of the government. They register with the government, ostensibly comply with government regulations, and pay taxes out of their salaries and profits.

The cryptocurrency platform or its funds may be subject to government action, but is not subject to government action. They are more like commodity commodities (such as gold or oil) than corporations.

A crypto like Bitcoin is not structured in a private way, it is a public company. They are simply software scripts and databases of information that serve the users of the platform.

Bitcoin’s origins are in code and market economy, not regulation. A market economy is automatically and naturally regulated by its reality and the voluntary orientation of its participants.

On the other hand, cryptocurrency companies such as FTX and Binance are government agents and are subject to regulation from the date they register with the government to engage in commerce. Bitcoin and most cryptocurrencies are open source projects, but FTX, Genesis, Gemini, Three Arrows, Voyager, etc. were regulated private companies.

Now, that doesn’t mean they’re doomed to begin with. Binance is still a solvent, regulated private company. It has even acquired rival companies that went bankrupt during the bankruptcy crisis.

Many of the world’s most beloved brands and millionaires were created by private and public companies under government regulation.

But Bitcoin is just one amazing new product that represents a complete paradigm shift from government regulation. It belongs to a paradigm shift called open source, and the open source movement is just beginning to create exciting new possibilities for the world.

In open source, the greatest solution to an age-old human problem lies in autonomous network governance.